Let the market decide IPO prices

For decades, Bangladesh's capital market has been trapped in a policy mistake of its own making: regulators, not the market, have set the prices of initial public offerings (IPOs). In most cases, shares were issued at their face value, usually Tk 10. Sometimes regulators permitted a small premium, based on their own judgment. On rare occasions, they allowed the so-called "book-building method", but with restrictions so tight that the outcome was never truly market-driven.

As a result, IPOs were systematically underpriced, as shown by their price performance at debut trading. In a well-functioning market, newly listed shares should rise about half the time and fall about half the time once trading begins. In Bangladesh, almost every IPO has skyrocketed on debut, often by 300 to 800 percent. Manipulation may have played a part, but the deeper reason is clear: regulators fixed IPO prices at a fraction of their fair market value.

This distorted system bred a dangerous illusion. Because the underpriced IPO shares were awarded by quota and lottery, investors came to view them not as investments but as jackpots, gifts handed out by regulators. It fuelled a culture of speculation and unrealistic expectations, eroding the seriousness of the market. Investors began to believe that regulators had a duty to guarantee profits. Even routine downturns in the secondary market sparked street protests by small investors, who blamed regulators for their losses. Regulators often diverted their energy to propping up market sentiment instead of focusing on their real mandate: ensuring transparency, fair play and the protection of investors' rights.

The damage did not end there. Many high-quality companies stayed away from listing despite enjoying tax incentives as large as 10 percent at one time. Why would a company sell shares at an artificially low price? For many, the answer was simple: it would not. The result has been a double loss. Companies missed the chance to raise capital efficiently, while investors were deprived of genuine opportunities. The economy as a whole lost out on the benefits of a deep, liquid and credible capital market that could have been a source for raising long-term funds.

The consequences are stark. Today, Bangladesh's stock market capitalisation is only about 7 percent of GDP. In India, the figure is over 100 percent. Even Pakistan, Sri Lanka and Nepal fare far better. Our market, instead of being a pillar of economic growth, remains stunted.

The distortions spread even further. The guaranteed windfall from underpriced IPOs, coupled with quota-based allocations to market intermediaries and other institutional investors, created an artificial demand for licences to operate as market intermediaries. The outcome is absurd. Bangladesh, with an equity market capitalisation of barely $30 billion and virtually no corporate bond market, is home to 68 asset management companies, 66 merchant banks and hundreds of brokerages. The mismatch between market size and the number of intermediaries is glaring.

The way forward is clear. Two reforms are urgently needed. First, IPOs must be priced by the market, not by regulators. The role of the regulator should be that of a referee, ensuring transparency, disclosure and fair play, not a player that dictates price. Second, quota-based allocations must end. Whether in jobs or IPOs, quotas distort meritocracy, reward connections instead of competence and undermine trust.

Bangladesh's economy has long outgrown its outdated IPO pricing model. If the country wants to attract good companies, protect investors and build the kind of capital market the economy deserves, it must finally let markets work the way they are meant to: through competition, transparency and meritocracy.

The writer is CEO of VIPB Asset Management Company and former president of CFA Society Bangladesh